Small Business Recordkeeping 101: A Guide for Ecommerce Entrepreneurs

Note: Bookkeeping and recordkeeping rules, regulations and best practices vary around the world, so be sure to conduct your own due diligence and consult the help of qualified professionals in your area. The information in this post is provided by Bench Accounting and is tailored to U.S. based businesses.

But when you’re staring down piles of receipts and other business records, it can be hard to know which records you need to keep, and which records you can send to the shredder.

In this guide, we’ll cover the items you need to store and keep for your ecommerce business. We’ll also explain how long you need to keep them, and efficient methods for filing records (to save you from the overstuffed filing cabinet).

The burden of proof to prove your business transactions is on you, the taxpayer. Since it’s up to you to back up every item on your tax return with supporting documentation, our advice is simple: keep everything.

During a tax audit, your first line of defense is your tax records. Your best bet is to store everything digitally, so it’s easily on hand in case of scrutiny from the IRS.

This will also help you avoid losing receipts—so you can support every possible tax deduction that applies to your business.

Since it’s up to you to back up every item on your tax return with supporting documentation, our advice is simple: keep everything.

The $75 Rule: Receipts You Could Toss (But Shouldn’t)

We’re going to stick to our “keep everything” guns here and say you should get into the habit of filing receipts for all of your business expenses. But it will help you to understand the exceptions to the recordkeeping rules.

You don’t need to keep documentary evidence for expenditure if any of the following apply:

The expense comes to less than $75 (Note: this rule does not apply to lodging expenses.)

It’s a transportation expense and a receipt is not readily available

You’re reporting expenses while traveling for business, which you account to an employer under an accountable plan, and for which you receive a per diem allowance

Remember, however, that any expense—even one under $75—can be challenged during an IRS audit. If you lack a receipt for any expenses under $75, the IRS will only uphold the deduction if you present certain information upon request.

Write these details down on the backs of paper receipts, or in a diary or calendar. You can also use a mobile app like Expensify to keep digital records.

You can learn more about IRS guidelines for expenses under $75 on the IRS website.

When Can You Shred Tax Records?

The Three Year Limit

Generally, you need to keep tax records for the three years following the date the expense was filed, or from the due date of your tax return —whichever comes later. Even if you file your tax return early, it’s treated as though it was filed on the due date.

An Example of the Three Year Limit

Let’s say that, a few years ago, you were well-organized, and you filed your tax return for the 2013 financial year on April 10, 2014. However, the deadline that year was April 15, 2014.

This means you would have to keep the tax records, receipts, and other supporting documentation connected to your 2013 tax return until April 15, 2017—three years after the date your return was due.

You can thank the period of limitations for this rule. The period of limitations is the period during which a taxpayer—that’s you—can amend their tax return. It’s also the period during which the IRS can perform an audit on your return.

When the period of limitations on your tax return expires, you’re no longer required to keep a copy of the tax return, or any of its supporting documentation.

However, this is tax law we’re discussing—which means that there are exceptions to every rule.

Exceptions to the Three Year Rule

Here’s a summary of exceptions to the three year rule, and a basic explanation for how long you should keep the records in each category:

Bad Debts and Worthless Securities

You’re able to deduct the value of bad debt or worthless securities on your tax return. But if you do, you have to keep records of these debts and securities for seven years.

Omitted Income

If you failed to report income that you should have reported, and it was more than 25% of the gross income listed on your return, keep records for six years after the date you filed, or the deadline for filing—whichever came later.

Employee Records

If you have employees, you must keep employment records at least four years after the date that payroll taxes were due or were paid—whichever is later.

Fraudulent Return or No Return

Just in case you were planning to commit tax fraud, or skip filing a return: there is no statute of limitations on breaking the law. The IRS can come after you forever.

It’s worth keeping in mind.

Property Records

Generally, you should keep records of property at least three years—the period of time in which you may be audited, or in which you can amend your return.

You need to keep those records so that you can calculate any depreciation, amortization, or depletion deduction, and to factor in gain or loss if you eventually sell the property.

Here’s an example. Say you got rid of a piece of property during the 2015 tax year. On your tax return for 2015, you report the money you made. You file right on the deadline—April 18, 2016.

You would need to keep records related to this piece of property for three years, until April 18, 2016.

The type of property records you should hold on to include deeds, titles, and cost basis records—for instance, receipts for computers or vehicles.

How to Store Receipts and Tax Records

Now you know how long to keep your tax records. The next step is develop an efficient and secure method for storing them.

Chances are your order history and transaction records already live in the cloud. But in the case of hard copies of receipts—for example, from one of your many trips to mail goods at the post office—it’s better that you go completely paperless.

Use cloud storage services— Dropbox, Evernote, or Google Drive —to keep copies of your paper documents online. If you have a large number of documents to upload, consider investing in a high-speed scanner.

It’s also wise to keep a backup of every document in a separate location, such as an encrypted solid state drive, or a different cloud storage service.

Keeping Records for Non-Tax Purposes

Your creditors, business lawyer, or insurance company may also want to see copies of your tax records, and they may need you to hold on to them longer than the IRS does. Once you’re past the period of limitations on your records, double-check that you won’t need them for another purpose before you shred them.

If you’re using digital storage, you can simply archive records you no longer need—rather than permanently delete them.